Africa: set to remain attractive to PE investors

RMB Corvest's CEO, Mike Donaldson

For many investors, securing superior returns on their investment now means looking abroad to emerging markets. The continent’s diverse countries each present a variety of risks and opportunities however, giving local investors a slight edge when it comes to cherry-picking the right deals…

From as early as 2011, a number of new PE investors started to create a presence for themselves in Africa, including select US-based firms and various China-based equity players. “The lack of liquidity on the continent means that there is continued demand for investment not only for infrastructure development and large-scale government projects, but also among niche private companies looking to expand their businesses,” explains Mike Donaldson, CEO: RMB Corvest. “This has set the scene for local and foreign PE firms to start exploring opportunities and making offers.”

Donaldson adds that many African countries are taking full advantage of the disarray being seen in the Euro Zone and promoting the redirection of available funds accordingly: “We’re seeing a case of most governments saying the right things. Democracy and stability are being promoted, and there’s a definite emphasis on stimulating the continued growth of their economies and jobs. This stands in stark contrast to the situation on the continent 10 years ago.”

As foreign interest in Africa grows and new PE investors begin exploring their options on the continent, many are still choosing to open their portfolio with acquisitions in South Africa and build from there. Donaldson believes that local investors looking for superior returns should similarly be building their portfolios up into Africa – and should utilise the “edge” South African PE firms still have over their foreign competitors to do this. “As part of the African village, local firms often have a better understanding of how to work in situations of political and other instability, and find ways to make deals work. Investing in Africa – successfully – will prove to be about perseverance, understanding the market, partnering with the right people and picking the right sectors, all of which have been learned by local PE firms in the South African context to a great degree. While investing in certain African countries is still very foreign for us in certain instances, these situations are often far less foreign to South African firms than they are to overseas firms.”

Local PE investors are additionally willing to invest in the lower end of the scale and are prepared to look at smaller equity cheques and reduced deal sizes – again based on experiences here at home. “This adds to our edge,” says Donaldson. “Foreign players coming into Africa are typically used to a larger and more mature market. They’re accustomed to playing in the US and the UK, with private equity funds focusing on much bigger deal ticket sizes. Coming into Africa and expecting to find private companies generating profits of US$20 to 30 million is going to be a challenge. There aren’t many companies playing in this space. Looking for a business making US$5 to $10 million profits  you’re sure to discover many more options – which is the approach RMB Corvest and other local PE firms are having increasing success with. Given the recent impacts of the recession and resultant lower levels of liquidity, one can, however, reasonably expect to see dampened local appetite for the higher risk of investing in Africa in the foreseeable future.”

With the continent continuing to market itself as the place to invest in and ongoing efforts to deliver on promises of superior returns, both South Africa and Africa can expect to remain the focus on investment attention in the months and years to come. “Spreading one’s risk across sectors and countries will arguably prove key for success however,” says Donaldson. “And partnering with the right promoter and PE firm will probably be the best means of achieving just that.”

Content sponsored by RMB Corvest.

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